Global markets have been hit hard by a slew of macro headwinds, but Morgan Stanley sees opportunities for investors to accumulate in “fallen angels” – stocks that the bank believes have sold out and now look attractive. With the MSCI Europe index down nearly 14% this year, Morgan Stanley believes European stocks have been oversold, with the index now trading below the long-term average price-to-earnings – an important metric that traders use to gauge the value of an asset. But despite the oversold conditions and lower valuations, the bank said it remains cautious about European equities. “Overall, we view stock valuations as reasonably attractive and not particularly cheap, especially as the underlying picture of corporate earnings is starting to look very challenging,” Morgan Stanley strategists, led by Ross MacDonald, said in a research note in May. 24. However, the bank acknowledged that there are pockets of opportunity for the “fallen angels” list. “We acknowledge that for a number of stocks and sectors the underperformance has already been extreme. Given this, we believe that investors are likely to sharpen their pencils on individual names as the downside risks begin to set in, and the risks and rewards seem attractive,” MacDonald said. . He added, “While we are tactically cautious, we believe there is a growing appetite from investors to build positions in ‘good companies at a better price’ – stocks where recent poor performance has created an attractive entry point for impatient investors.” CNBC Pro highlights five of Morgan Stanley’s “Fallen Angels.” Capgemini Morgan Stanley regards French consulting firm Capgemini as a “safe haven” stock at an “attractive valuation”. The bank noted that the company has a track record of being relatively defensive and has done well during the coronavirus pandemic. Capgemini is also exposed to structural technology topics, such as Demand Acceleration for Digital Transformation and Digital Manufacturing/Industry 4.0. The bank sees the stock as an attractive value for that growth opportunity, and has set a target price of 237 euros ($254) per share. This indicates a potential upside of 31.3% for the stock’s closing price of €180.5 on May 31. The bank believes that e-commerce is a secular trend that “is here to stay” – despite normalization in the sector this year and a possible slowdown in consumption. Morgan Stanley noted that Deutsche Post has invested in automating and digitizing its processes, as well as expanding its customer base – all of which has led to the growth of both its capacity and controllable market. MacDonald noted that the stock also looks cheap compared to its peers, with the stock trading at a discount compared to its US counterparts — 45% and 10% off for UPS and Fedex, respectively. “We find that these reductions are exaggerated,” he added. EssilorLuxottica Morgan Stanley believes the company’s revenue profile is the most flexible of its peers. “In light of market concerns about weak consumer sentiment, we view EssilorLuxottica as one of the safest games for consumer investors, given the healthcare-driven revenue profile,” MacDonald said. The bank expected the company to achieve a five-year compound earnings growth of 11%. The main driver behind this will be synergies and product innovation. The bank believes that the company offers a “much greater level of [earnings] vision” relative to consumer names and other brands. LVMH The bank said LVMH remains a “top choice” in a sector that has been downgraded since late 2021, describing the company as a “structural winner in market share” in virtually all the companies in which it operates. Moreover, LVMH is the only player exposed to reopen trade in the luxury space, the bank added.The bank said it remains “optimistic” about the company’s growth outlook and believes it should “hold up better” than its peers in an adverse environment. SAP Despite the market’s rotation away from growth and tech stocks, Morgan Stanley said he remains “confident” that SAP can do “relatively well” in the slowdown given the mix of recurring revenue and product offerings that can help companies reduce their revenue growth. “SAP delivers a combination of high recurring revenue, strong drivers of product and market demand, and a valuation now lower than previous floor levels.” It also continues to see a “positive catalyst” in the cloud business of the SAP row.
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Global markets have been attacked by a slew of macro headwinds, but Morgan Stanley Sees opportunities for investors to accumulate in ‘Fallen Angels’ – Stocks that the bank thinks sold out and now look attractive.
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